The global pandemic and other factors, such as the war in Ukraine, have had ripple effects on global economies, with one particularly noticeable impact being skyrocketing shipping costs. Interestingly, you can still score good deals – if you know where to look. Case in point, for your low-cost maritime supplies, contact Merritt Supply. That aside, the rising costs have resulted in higher commodity prices globally. Here’s why and how…
The pandemic caused a significant decrease in global trade, as businesses closed their doors and consumers stayed home. And the extended lockdowns further exacerbated the situation as governments offered stimulus packages to help stem the tide. As a result, demand for goods and services increased, overwhelming our supply chains.
But as countries began to reopen, there was a surge in demand for goods sitting in warehouses for months. This sudden increase in demand has sent shipping costs soaring, even as the shipping industry struggles to keep up.
Similarly, shipping companies raised their prices as they grappled with the challenges of keeping their workers safe and complying with new health and safety regulations. And as border crossings closed, many companies were forced to reroute their ships, adding to the congestion and delays.
Aspects such as port closures over the last two years, the increase in quarantine measures, and a decrease in the number of available ships have all conspired to create significant delays in shipping. These delays have led to a backlog of orders (as containers are waiting to be loaded onto vessels).
As a result, prices for goods have increased as businesses attempt to cover the cost of the delays. Ships have been facing delays due to several factors, including:
- Port congestion,
- Bad weather
- Shortage of containers.
This has led to a knock-on effect on the delivery of goods – as some items take weeks or even months to arrive. Meanwhile, the increased demand is putting even more pressure on an already strained system.
The Impact on Global Prices
Traders are now passing on the soaring shipping costs to consumers through higher prices for goods and services. This has impacted economies worldwide as inflation rises and businesses struggle to cope with the increased cost of doing business.
Undoubtedly, shipping costs significantly impact global inflation rates. According to a study by the International Monetary Fund, inflation rises by about 0.7 percent whenever freight rates double. And the effects tend to persist for up to 18 months. So, what does this mean? The rise in shipping costs we started experiencing in 2020 will have a sustained effect on inflation in 2022 and beyond.
Between March 2020 and September 2021, the shipping cost of a container of goods on the transoceanic trade routes rose seven times. Similarly, shipping costs for bulk commodities like crude oil spiked even more. And the trend looks set to continue as shippers attempt to recoup the billions of dollars they’ve lost over the last two years.
What does this mean for you? If you’re in business, the increased shipping cost will likely eat into your profits. And if you’re a consumer, expect to see the price of goods and services continue to rise in the months ahead. In either case, it’s crucial to stay on top of the latest developments so you can plan accordingly. In short, we’re not out of the woods yet.
Some Countries Bear a Heavier Burden
Inflationary pressures affect some nations more than others. For starters, an economy’s structural characteristics impact inflation and the resultant effects. Case in point, if a country imports a significant portion of its goods (and services), it’s more likely to experience higher inflation when global shipping rates increase.
On the other hand, if a nation exports a large share of its output, higher freight costs could translate into increased competitiveness in the global marketplace. This is because domestic producers need to raise their prices less than their foreign counterparts to maintain market share – if all the other factors are constant. Similarly, landlocked countries or low-income economies typically bear the brunt of inflation as they contend with higher freight costs.
At present, we’re in the eye of the perfect storm in the shipping industry, with a surge in demand and many challenges causing delays and disruptions. And as businesses pass on the increased cost of shipping to consumers, the result is a rise in the prices of products across various industries. Consequently, it remains to be seen how long this will continue and what the long-term impact might be on global economies.